Why Co-signing a Loan is the Best Way to Help Your Kids Borrow for College

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I know, you love your child and want the best college for them.  They worked so hard but are a little – or a lot – short of affording their dream school.  Don’t fall into the parent trap of borrowing heavily for college at the expense of your retirement.  You can help them without hurting yourself.  Here’s how to find the middle ground.

Start by framing the discussion like this: college loans should be the last resort, not the first option.  First, look to savings to reduce future debt.  Even if you start late in high school, it’s ok because bills will continue to arrive four or more years down the road. Saving a dollar today beats borrowing one tomorrow. Here’s an article on college affordability and a podcast.

Next, look for free money: gifts from relatives, grants and scholarships that do not have to be repaid.  Here’s an overview of need vs. merit based aid, and a drill-down on grants.

Finally, determine if you or the student can contribute earnings while the student is in-school racking up those bills.   When savings plus free money plus current income exceeds the cost, no loans are necessary.   Be sure to account for all four (or more) years the student will be a college student, if there is a gap between expected cost and available resources, then it’s time to consider loans.  For most students, the Federal Loan program is by far the best option when you consider the interest rate and repayment terms.  One problem: the amount that can be borrowed is capped.

Let’s assume that the student takes a government loan but a gap still remains between the cost of college and the sources of money. Now all eyes turn to you (or perhaps grandparents or other relatives) for help.

The BEST ADVICE:

  • Co-sign a loan and make sure it has a co-signer release. Many private loans now have a feature to permit you to be dropped from the loan once your child establishes their own good credit.   With this type of college borrowing, you effectively lend your established credit profile to your child so they can be approved for a loan at a time they would not qualify on their own.   Once a good repayment record on the loan is established, the student should contact the loan provider to release you, the co-signer, from future obligations to pay.  Co-signer release is a terrific feature because it permits you to help your child borrow when they need your help. And for you to be released from that obligation when they get on their financial feet.

If there’s no way around it and you have to be the designated borrower, you should:

  1. Shop around. Many parents with good credit can receive substantially lower interest rates on private loans from banks, finance companies or state agencies than the Federal PLUS program.
  2. Be VERY wary of the Federal PLUS Loan. Parents with marginal or bad credit may be eligible for a Federal PLUS loan, but be wary.  The credit analysis used to approve a PLUS loan is minimal and the amount that can be borrowed is very high (the full cost of attendance).  Sounds good?  It’s not.  It is a toxic stew. The government regularly makes large loans to people who will be unable to make the payments.  This is a ticking time bomb waiting to explode.   Also, some parents falsely surmise that they will transfer their PLUS loan to the student in the future.  That is not possible under the terms of the PLUS loan. It is a Parent loan, not a student loan.
  3. NOT borrow from your retirement accounts to pay for your child’s college. It sure sounds good to “repay yourself” the interest that accrues on a loan rather than paying a bank, but it is a terrible idea. Why?  Every dollar you withdraw from your retirement account is one less that can earn interest, dividends or appreciate to grow your retirement savings – and at a time when your retirement is fast approaching.  Just as young families are instructed to start saving early to benefit from compounding, older savers should avoid touching the nest egg because you (we) are running out of time to grow the account. This is no time to stretch.

If you’re a data hound and seek some data about parent (and grandparent) borrowing, check out the Consumer Finance Protection Bureau’s recently released “Snapshot of Older Consumers and Student Loan Debt.”

Like many data analysis, this one can be used to support both sides of an argument.   Here, (a) older (age 60+) borrowers are under stress and (b) older borrowers are doing ok.     The CFPB report compares the 10 year period 2005-2015.  The data in parenthesis is 2005 data as cited in the report:

Older borrowers are under stress:

  • Consumers age 60+ is fastest growing segment of the student loan market
    • They owe $66.7 billion
    • There are 2.8 million older borrowers, (up from 700,000)
    • They owe on average $23,500, (up from $12,100)
  • Delinquencies are up from 7.4% (2005) to 12.5% (2015)
    • 37% of borrowers over 64 are in default
    • 40,000 have Social Security benefits offset (8,700 in 2005)

Older borrowers are doing ok:

  • 73% is borrowed for children or grandchildren – indicating a choice to help rather than being burdened by their own debt.
  • Fewer than 31% of older borrowers owed federal loans (867,000 of 2.8 million)
    • Fewer than 7.5% held PLUS Loans (210,000 holders)
  • Of 2.8 million borrowers, only 1,100 lodged loan complaints with the CFPB

What does this all mean?

To me, it’s clear.

  1. Parents should establish a college savings program for their family that is appropriate for their financial situation.
  2. Students should seek financial aid by filing the required forms.
  3. Parents and students should realistically assess how much current income each can contribute to defray costs while the student is in school.
  4. Students should be primarily responsible for taking loans for college. The federal loan program is the best solution for most of them.
  5. If parents are enlisted to help their students with loans, they should contribute by co-signing a loan with a co-signer release.
  6. If parents need to be the sole obligor to borrower for their child’s education, they should shop around, be wary of the federal PLUS program and not borrow from their retirement account.

I can’t help but think of the airline oxygen mask analogy.   There is a reason we’re instructed to put on our oxygen mask before taking care of a child.   Incapacitated parents are of no help to kids.  The same is true for parent borrowing for college.  If you feel compelled to help borrower for a child or grandchild’s education, be sure not to imperil your future well-being.  Co-signing a loan helps the next generation achieve their dream of a college education without imperiling your dream of comfortable twilight years.

Check out Invite Education #MyCollegeCorner on YouTube

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Making sense of complex college funding questions just got easier!

Check out the Invite Education YouTube channel for #MyCollegeCorner videos featuring answers to your most common questions, and insight on how best to proceed.

The Free Money Mini-Series begins this week bringing light to the subject of grants and scholarships, your favorite money from the financial aid office since it does not need to be paid back like a loan.   Like, Share and Subscribe!

 

Highlights from the RI Jump$tart Financial Capability Conference: #FinLitRI on Twitter

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Highlights from theRI Jump$tart Financial Capability Conference!

Financial literacy is modernizing with new tools to deliver empowering knowledge helping people make smart financial decisions. It’s grown to include   and  and more as featured throughout the conference. Invite Education supports these initiatives, with Jeff Bentley in attendance, providing copies of the new book “Plan and Finance your Family’s College Dreams”:

 

‘Tis the season for College Savings: 3 Painless Holiday Tips

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The year-end affords the opportunity to reflect and optimistically plan ahead. Use these three holiday hints to get started and by this time next year, you’ll be proud of your accomplishments. (…and don’t forget to clue in grandparents and other relatives to get a bigger bang for your buck!):

  • Check the couch for loose change – 2017 style:   I was riding the elevator with a woman who was reading Plan and Finance Your Family’s College Dreams and she offered one of the best tips I’ve heard:
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    …find more than loose change in your checking account

    Check the automatic payments connected to your checking account and cancel those you don’t regularly use or need.   She found more than $75 per month – loose change in the couch, 2017 style.  Next year, her re-allocated spending will fill up a 529 college savings plan with nearly $1,000. It’s repurposed “found money” that has no impact on her current spending or life style. Brilliant. How much can you find?

  • Make the Gift of College a Holiday Present: 2016 was a breakthrough year for innovation to make savings in 529 Plans easier. According to the College Savings Foundation, 90% of parents said that online and other gifting options would make college savings easier – and their holiday wish has been fulfilled. These innovations come in many variations so finding options that work well for your family should be easy. The College Savings Foundation outlines the various opportunities, which include:
    • Online gifting and/or gift certificates and coupons that can be printed and presented as gifts – with the gifted amount automatically deposited into a 529 account.
    • Emailed invitations offering gift givers access to make a gift directly into a 529 account.
    • Customized web pages with family or beneficiary (student) specific information.
    • GiftofCollege cards available at Toys’R’Us and Babies’R”Us or from some employers allows gifts to be made into any 529 Plan offered in the country.
  • Use Credit Card “Cash-Back” Rewards to Fill up 529 Plans. Find a credit card linked directly to 529 Plans or be disciplined about depositing Cash Back Rewards from other cards into a college savings account. The great things about these programs is that they allow you to fill your 529 coffers as you go through your normal day: no behavioral changes are necessary. Just be sure to not roll-up big credit card bills that you can’t pay in full each month to avoid paying big interest that will easily wipe-out the amount you can save.
    • Credit Cards linked to College Savings. There are several credit cards that permit users to accumulate cash back rewards to be deposited into 529 account. Some of these programs include:
    • CollegeCounts 529 Rewards Visa Card offers 1.529% back for those with a 529 Account offered by Union Bank in Alabama’s 529 Program and the Illinois Bright Horizons.
    • Fidelity Rewards Visa Signature Card offers 2% cash back to certain Fidelity accounts including Fidelity managed 529 Plans.
    • The Upromise MasterCard offers a range of cash-back benefits depending on the products purchased and the merchant from which they were purchased.
    • Other Cash Back Cards. Even if your credit card is not directly linked to a 529 Plan, you could easily take some or all of those cash rewards and deposit them into a 529 Plan. Every bit helps!
    • Learn more: “Using a credit card to save for college” from New York Times Money Adviser.

Each of these will allow you to increase savings without changing any of your current spending or giving habits. Find one or more that work well for your family. Recruit grandparents, relatives and friends to help and you’ll accumulate a nice nest egg that will no doubt reduce the amount that might need to be borrowed for college later. A dollar saved today is better than one borrowed tomorrow!

Send your success stories and other tips to info@Inviteeducation.com as you plan, save and succeed in 2017.

Happy Holidays!

John Hupalo is the Founder of Invite Education and co-author of the recently released book: Plan and Finance Your Family’s College Dreams: A Parent’s Step-by-Step Guide from Pre-K to Senior Year

The Harvard Coop features “Plan and Finance your Family’s College Dreams”

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12/6/16 UPDATE**

Thanks so much to the Harvard Coop for hosting the event!

 

 

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Join authors John Hupalo and Peter Mazareas at the Harvard Coop for discussion and signing of the new book “Plan and Finance your Family’s College Dreams”, available now.

Topics include:

  • Grade and age appropriate guidance for parents with newborns through 12th grade Admissions and financial aid tips
  • Learning about 529 plans for college savings
  • Important deadlines that can’t be missed
  • Audience questions on planning and paying for college

Date: Tuesday December 6, 2016 @ 7:00 pm

Location: Harvard Coop. 1400 Massachusetts Ave Cambridge, MA 02238

Contact: 617-499-2000 www.thecoop.com

A Mixed Bag of Tricks & Treats in the College Board’s 2016 “Trends” Reports

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College data nerds love late October.  Why?  The College Board releases its annual Trends in College Pricing and Trends in Student Aid   These reports, much like Sallie Mae’s How America Pays for College, are chock full of  data and analysis to understand important trends in how American families plan and pay for college.   At the very least, be sure to read the Highlights and Introductions in each report.

As in years past, it’s a mixed bag of results with sprinklings of good news, bad news and news that can be used to support seemingly contradictory arguments.

Good news from the reports:

  • College loan borrowing declined for the fifth consecutive year.
    • Undergraduates and their families borrowed 18% less than 5 years ago.
    • For undergraduates, federal and non-federal loans constituted 36% of funds used to supplement student and family resources – the lowest amount in 20 years
    • Only 10% of undergraduates leave college with more than $40,000 of debt
  • Total grant aid now exceeds $125 billion having increased almost 90% from 1995-2005 and then another 79% in the next decade.
  • Institutional grant aid has almost doubled over the past 10 years from $29.1 billion in 2005 -06 to $54.7 billion in 2015-16.
    • Grant aid accounts for the highest level of funds used by undergraduates to supplement their own resources over the past 20 years.

Bad news from the reports:

  • Pell Grant expenditures for the nation’s neediest student continued to decline from $39.1 billion at the peak in 2010 to $28.2 billion in 2015 (but is still more than 80% greater than pre-financial crisis spending).
    • The number of Pell Grant recipients declined for the fourth consecutive year (but the percentage of undergrad recipients is up to 33% from 25% a decade earlier.
  • Public funding (state and local appropriations) peaked in 2007-08 at $85.2 billion and declined 9% to $77.6 billion for 2014-15.
    • We’re spending less on public education than 30 years ago: funding per FTE student is 11% lower than it was 30 years ago
    • Declining state revenues per student are resulting in the rising prices at state schools.

Mixed news from the reports: could be better or could be worse

  • Tuition and fees continue to outpace inflation — rising from 2.2% to 3.6%, but the rate of increase is less than previous years
  • The favorable trend of net price declines from 2008-2010 reversed. Net prices paid are now increasing again, but – and it’s a big but – the net price paid at 4 year private and 2 year public schools in 2016-17 is still less than what was paid in 2006-07.
  • Total federal grants to undergraduates nearly doubled from 2005-2015 to $41.7 billion in 2015-16, but $10 billion less than the peak in 2010-11.

Facts from the reports that we’ll all be using in the coming year:

  • Total federal aid to undergraduate and graduate students: $240.9 billion
  • Total non-federal borrowing: $11 billion
  • More than 70% of full-time students receive some grant aid.
  • In-state college costs vary widely (from $5,060 to $15,650) depending on the state of residence
  • Undergraduates received an average of $14,460 per FTE student in financial aid
  • Default rates are highest for borrowers with balances less than $5,000 and decline as balances increase
  • 14 million students took $18 billion in tax credits and tax deductions. Nearly 25% of these recipients had incomes between $100,000 and $180,000.
  • The federal work-study program is relatively small: 632k students earned $982 million

Here’s what struck me when considering the reports and their context.

  1. The College Board does a painstaking job of presenting apples-apples analysis for consistency, but be careful when comparing these data to data in other reports – particularly data related to cost of colleges (i.e. know if it’s 2 or 4 year, in-state or out, all-costs or just tuition and fees, etc).
  2. With a glass half-full approach, the data on loans is most encouraging to me: total amount borrowed is down considerably and most students are not over borrowing. The obvious conclusion: future college graduates will feel less strain than their predecessors.  A less obvious question:  is borrowing down because students are choosing less expensive schools, are they receiving more aid or is it a combination?
  3. The financial crisis is now nearing its 10th Anniversary.  We’ve seen how the market (students, parents, governmental entities and colleges/universities) reacted and now how it is normalizing.  In the teeth of the crisis and the subsequent recession, tuition and fees increased significantly when compared to inflation but families actually paid less because the federal government stepped up and provide more grant aid and tax credits.  That trend has reversed as increases in aid no longer exceed increases in college costs — hopefully families will not fall into the trap of therefore increasing the amounts they borrow to reach for a school they cannot truly afford.

With data showing both advancements and set-backs in the college financing market, I continue to strongly believe that:

What do you think?

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John Hupalo is the Founder of Invite Education and co-author of the recently released book: Plan and Finance Your Family’s College Dreams: A Parent’s Step-by-Step Guide from Pre-K to Senior Year

Paying for college with early admissions

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Have you looked into getting admitted to a preferred school much earlier than standard admissions deadlines?  Then you’re probably considering an “early decision” or “early action” where the student chooses to attend a specific college much earlier than standard admissions deadlines.

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Early Bird admissions and financial aid

Know the difference: Early decision (ED) refers to a binding decision to attend a specific school.  Students taking early decision commit to one specific school as early as the fall semester of senior year, foregoing admission to any other institution.  Early Action (EA) is a non-binding admissions process where students are notified very early of their acceptance but may choose to attend a different school.

Early decision: How’s it paid for? Going forward with an early decision requires organization and a clear path to covering the balance.  Traditionally, the biggest challenge associated with early decision was affordability, since the choice was made without comparing actual financial aid offers from other schools.  Gaining early admission with the means to pay the bill outright regardless of financial aid and scholarships works for some, but not all families. If the financial aid offered with an early decision application is too low, families have the option to appeal the decision and ultimately reject if proven unaffordable.  Going through early decision only to end up not attending is an avoidable stress through realistic college planning, so unless the school is an absolute “must attend” situation, it may not be worth applying this way.  It’s expected that students only submit one early decision application to one school, but may also submit standard applications to other schools by agreeing to withdraw those applications if accepted for the early decision school.  There is a wide gap from early admissions beginning in November to when standard admissions deposits are due in May, so be aware of deadlines to know when a final decision is required.

Early action: What are my options? Early action admissions allow students the benefit of immediately applying to several schools instead of just one.  This allows for families to compare financial aid offers without being bound to just one institution. Early action has become much more common to help students zero in on their final college choice after recognizing all their best options. Early action does require a pro-active approach to make sure each school has all admissions and financial aid information available allowing for clear comparisons between offers.

Financial aid applications are early too: The FAFSA (and CSS Profile) has been available since October 1, 2016 for college students beginning their freshman year in Fall 2017.  This is 3 months earlier than the traditional January 1st FAFSA date, allowing more time for schools to begin sorting through many financial aid requests and early admission applications.  Since this is the first time FAFSA is being made available so early, most schools are still following  regular deadlines like in March, April and May.  But for families handling early admissions, this earlier date hopefully provides more breathing room to compare options.

Merit based vs need based funding: Remember the differences between college funding. Grants are need based financial aid awards provided by federal, state and school programs considering  income and asset information on the FAFSA and/or CSS Profile.  Merit based scholarships are awarded to students considering high test scores, grades, sports, community service and other student qualities and achievements.  When making a final choice about early admissions, make sure the financial aid award letter accounts for both need based and merit based funding eligibility.  You want a complete financial picture when comparing school options, which is why all your financial aid documentation needs to be filed as early as possible.

 

What to look for on a college visit

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Visiting colleges is fun, but with all the excitement, it’s easy to miss some important lasting details that can make (or break) a campus experience.

Know the costs before you go: Make comparing campuses easy by knowing the tuition, room, board and expenses before the visit. This way you can enjoy the experience while being practical about the value provided and how it can be paid for.

Try the food: Meal plans have a variety of options to match student needs and schedule.  Stop by the cafeteria or other food vendors on campus to look for….

  • Quality: Is the food worth the cost of the meal plan?  Is there enough fresh food available to keep students healthy and energized?
  • Access: Where is the cafeteria and what’s the time schedule?  Are there multiple food locations open at different hours serving different food?

Talk to the students:  Ask about their experience and why they chose the school.  What do they like best, or are there some things they want to see improved?  Hearing it directly from current students can provide great insight to make a decision.

What’s the campus like? A campus can change rapidly depending on the day of the week. Big events and sports will take over space, especially during football season.  Other schools may be very busy during the week and very quiet on weekends.  Compare schools considering their percentage of resident and commuter students to recognize differences in campus life.

Class drop-ins: If possible, stop into a class room to listen and learn.  Be on the look out for teachers in majors you are interested in.  Ask questions about their respective programs and gauge your own interest in pursuing more knowledge.  How would you handle class in this environment?

Facilities: A campus is made up of many buildings and locations. Gyms, class rooms, labs and parking are just some of the things in plain view, but while on tour look for details like how spacious or crowded it was and the ability to navigate between buildings.  Ideally, you are looking for very safe, clean and well managed locations.  Most importantly, how’s the internet connection?

John Hupalo on college planning solutions with “The Opening Bell” WGN Chicago

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Families putting together college plans are looking at different avenues to find success.  John joined The Opening Bell to share some insight from the book “Plan and Finance Your Family’s College Dreams“, helping families get through the planning process.

  • Starting early on savings will reduce the need to borrow in the future.  There’s 529 programs in place with creative ways to hit savings goals over time. Consistent long term savings combined with any gifts can really grow.
  • College value is different for every family. Be realistic, rather than pessimistic or optimistic.  The planning process has many little steps involved to determine the right fit school considering everything going on in a young person’s life.
  • During election season, we hear ideas about “free” college and student loan debt forgiveness being made more widely available.  At the end of the day, college choices come down to individual decisions based on personal goals and needs. Real solutions are not easily found through claims made during elections.

Check out the full recording beginning @ 19:43 on WGNRadio.com

 

How financial literacy helps with college affordability

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There’s no doubt that college is expensive.  Just ask any parent helping their son or daughter enroll this fall, or even file the FAFSA in preparation for next year.  College affordability is at the heart of the issue, but real potential solutions to the problem can be swept away under the daily sound bytes generated during this aggressive political season.  But politics aside, there is no easy fix for college affordability regardless of voter preference, leaving families to decide on their own how to navigate.  Let’s consider how financial literacy helps manage decisions about college affordability.

“It’s cheaper to save than to borrow”: Parents that recently started a family, and even more recently paid off their student loans are very debt conscious, perhaps spurring the trend of greater college savings.  The “How America Saves for College 2016” report from Sallie Mae shows that a full 57% of families are now saving for college, a 9% swing in just the past year.  screen-shot-2016-10-05-at-9-54-01-amIn particular, it’s millennial parents taking the lead on goal setting and developing a plan to pay for college, all hallmarks of financial literacy teachings.  It’s inferred from these findings that new parents recognize the importance of education, but are wary of student loans.  While Washington needs to work out the student loan mess, families are taking control of their savings plans to make a smarter and more affordable investment in higher education.

Using college financial calculators: It’s easier now than ever to make and compare estimates on college costs, student loan repayment and savings, helping families look at the big picture first.  Before zeroing in on a college choice, it’s wise to take a look at a wide variety of options for perspective.  Consider questions like potential financial aid eligibility versus the sticker price of select schools, or if the lowest priced option is really the best fit.  These questions are simplified with use of financial calculators as reasonable comparisons are grounded in logic, ensuring informed decisions on college choice.

Power of compound interest: Long term savers know one big secret. Over time their money can grow with the power of compound interest.  Financial literacy helps families harness the power of compound interest through simple knowledge, like demonstrated with the “Rule of 70”, to show how money can double over time.  While financial calculators help with the details, the impetus behind saving begins with the motivation to start early, rather than later, to make college more affordable.

Identify college value: Know thyself! If financial literacy can teach us one thing, it’s that everyone needs to make their own choices based on their own needs.  Financial literacy helps with perspective on this issue, recognizing that college value really depends on individual factors managed on the personal level.  When weighing the many variables, from majors, school reputation, and internships and compare them to facts like costs, student loan debt and out-of-pocket expenses a pattern is revealed.  Some colleges will be too expensive while others may be a bargain relative to the needs of the student.  Using practical teachings from financial literacy promotes sound decisioning through the process to make the college experience an affordable one.